May 2nd 2005

China: Revaluation is not imminent

Last week, the Yuan briefly traded outside of its prescribed band, breaching 8.27 Yuan/USD for the first time in over 10 years. Immediately, traders began to float rumors that China was conducting a "dry run," and would soon allow the Yuan to float. China’s Central Bank, however, quickly sold USD, and the Yuan returned to its normal level of 8.28, which was set in 1994. China issued an official press release following the event, stating the fluctuation was an anomaly, and revaluation was not ‘imminent.’ The damage had already been done however, as investors seem more confident than ever that China will soon switch to a floating exchange rate regime. Trading in Yuan futures has reached a feverish pitch. These futures reflect investors’ future expectations. In this case, the increasing futures prices indicate that traders believe revaluation is still imminent. Most analysts concur, arguing that the revaluation will likely take place before the year ends. The Taipei Times reports:

Beijing says it will eventually let the yuan trade freely on world markets, but that doing so immediately would damage the country’s frail banks and financial industries. J.P. Morgan Chase & Co predicted China will loosen its decade-old peg to the US dollar next week.